How to play oil

I get to blow my own horn a little here—regular readers of this blog know that I am always willing to confess my bad calls – so I like to think that this gives me the right to note when I am correct. Back in early February, after WTI crude put in its $44.50 low point, I noted that oil has NEVER put in a simple bottom after a significant crash. I suggested that a rally would likely occur off of that low point, followed by an eventual return to $45 or lower prices. This formation would be a classic bottom basing pattern – often known as a “Double Bottom” formation. https://www.valuetrend.ca/oil-is-setting-up/

oil short

 

The trick with trading off of any market bottom is to leave your pride, fear, greed and emotions at the door. We must follow some rules if we wish to trade the patterns of oil correctly. There are a few scenario’s that may play out over the coming weeks or months. Allow me to present a brief trading plan that I am considering, along with my entry & exit rules. Greater details on these trading rules can be seen in my book Sideways:

  • WTI Oil might find support at current $45-ish price levels (the February low point), and successfully bounce –If this happens, wait for it to hold for 3+ days before entering a trade. I’d also like to see momentum oscillators hook up to confirm the trade—note the bearish near termed pattern at the time of writing (chart above). First resistance in the low $50’s may provide a short termed sell point. Let’s call that  target about $53 or so. A failure to hold above $44.50 at any time will be a sell signal – limit your losses by stopping out below that point (wait 3 days to confirm it is not just a spike, and then sell).
  • Oil may fall through $44.50 and find a low point near 2009’s low of $35-$40. Should crude find support there, look for it to hold for 3+ days, as noted above and consider entering into a position.  I would look for a sell target  first to $45, and then the low-$50’s.
  • A break to the upside through $53-ish that lasts 3+ days will target $57, then $67. Keep your eyes open at those levels.
  • Near-termed contract crude oil ETF’s such as DBO-US, USO-US and others may be appropriate for the early oil trade. We plan on legging into a trade in 3 stages, should oil find support at a level noted above. First will be an oil ETF, then an equity trade via either an individual stock or an energy ETF. Then a longer contract oil ETF such as Horizons Winter-contract HUC-TSX. By legging in over 3 stages, should the trade go wrong we will have avoided moving into the trade with too much capital.
  • Our entry points will be: First leg on the 1st bounce (possibly off of $44.50 or the 2009 lows). Next leg upon the penetration of the next resistance level (depending on where the bottom bounce occurred). Then a final leg into a longer crude contract ETF, as markets dictate.

 

Good luck – it will be interesting to see how this trade plays out.

15 Comments

  • You mentioned the 3 day rule if oil bounced off the $45 area, but where oil just broke support of $44.50 is there a time frame you will give it to bounce back over 44.50?

    Reply
    • If oil drops through $44.50, wait 3 days to see if its a genuine break. If it is, wait for the $35-$40 area support zone as the next buy zone.
      If it rallies back to close over $45, let it hold or rise from there for 3 days before buying.
      Those are my buy/sell rules–its not perfect, but its worked for me more often than not.

      Reply
      • So we went down to almost $42 but we have rebounded and stayed above $45 for three days. That meets the criteria of your methodology. Are you confident to take a position at this point or was $42.41 too much of a violation that you might expect a $30 range test? Thx

        Reply
  • OIL
    For sure you have bragging rights.

    A very reasonable trading plan for those of us who support using technical analysis. I much prefer this approac to people with obvious conflict in the media talking about $70 OIl by year-end. If I may make a cooment/query. The situation for oil fundamentally is very different than 2009 lows, could this translate to a much longer basing period than any of us care or have patience for.

    As always, thanks for your great analysis.

    Khokon

    Reply
    • You never know exactly how a trade will turn out Khokon–all you can do is follow your rules and keep a close eye on your trade for violations

      Reply
  • I see some nice positive divergence on the daily oil chart with the MACD, Stochastics and RSI all doing that hooking up action

    Reply
  • Oil is a great trade for the next year or so. Buy when it dips to the low 40’s sell in the low 50″s. It should be in this range for a long time, longer than most think.

    Reply
    • Yes–see above comment Dave–we bought on day 4 of the recent test. Looking to possibly sell $54-55

      Reply
  • Kieth, have been lurking on Smart Bounce for quite some time. Am also a reader of Mr. Thackray’s Timing the Market. Good work on both sites.

    I have been watching the WTI chart and based on the 3 day rule I opened a small position using USO. However it seems only roughly >50% of the holdings are forward contracts. (Future Contract On Wti Crude Future Apr15 49.25%) You mention legging in to the trade by use of an ETF. Is USO still your preferred vehicle at this juncture? I have a close eye on this trade and am looking forward to a resistance level at $53.00 Any insight would be appreciated. Keep up the great work.

    Reply
    • David- we follow our own advice-we bought USO on the 4th day at WTI oil $47
      Target is $54-$55 for oil
      As my trading plan outlined, I would add if it breaks $55, I will sell if it fails at $55

      Reply
  • Kieth. I am still in agreement that oil will finish 2015 higher than where it started. We have a few things going for us. However I think there may be a flaw with the vehicle of choice. I am also a subscriber to Oil & Gas investment bulletin. Who have come out to day with a short on USO. The reasons being the spread on the current vs. second month contracts, contango, and other reasons.
    Again not to say that long oil is a bad bet. The position being that USO may be the wrong vehicle for that bet.

    http://oilandgas-investments.com/.

    Reply
  • I sold at $54 yesterday. Now I am wondering if the diminishing storage issue won’t cause one more test of previous lows or even the 2009 low. Isn’t it reasonable that speculators need to be flushed out before a bottom can be confirmed.

    Do you consider these factors when making trade decisions or do you rely solely on the charts?

    Thanks so much!

    Reply
    • The charts usually tell us what to do James.
      I follow some trading rules that I developed through practical experience over the past 25 years–outlined in my book Sideways. A system will reduce your losses and increase profits if practiced religiously–so I just follow my system. It works well enough that we’ve been outperforming with lower risk than markets and most managers for many years.

      Reply

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